How not to be screwed over by a Financial Advisor

It’s no secret the blogosphere tends to hold financial advisors in contempt.

The money blog movement is steeped in DIY gumption that does not lend itself well to seeking outside help. Additionally, even though bloggers won’t admit it, at some subconscious level they have a self-serving interest in admonishing the industry.

Let’s be honest; it’s a lot harder to sell eBooks, courses and affiliate links to people who are being served by an advisor.

I have had the privilege of having a foot in both the world of money blogging and the world of financial advising. Having straddled the rift has taught me a lot about advice in general and helping people.

Today, I am going to peel back the curtain a bit and offer an objective look at the world of financial advice and offer some tips on how not to get screwed.

I appreciate Steve for lending me his platform to discuss this issue, because one of three things will happen:

1. Several Money Bloggers will disagree
2. Several Advisors will disagree
3. In disagreeing, they will prove my points.

My Background

I have worked successfully in the personal finance industry since 1999, and I continue to work in the industry.

Intentionally,  I do not discuss my practice, resume or qualifications on my blog or other blogs because my blog is a separate outside business activity and I do not want to blur the lines or give the appearance of giving investment advice (which this post does not do).

Experience

I have seen several bloggers that have worked for brief periods of time in entry-level positions in financial firms, then leave their position and claim to have industry experience.

While technically correct, it's important to understand that the financial service industry works on an apprenticeship-style model.

Firms sponsor candidates for their exams, then once they pass their exam, the firms then continue to train and supervise them. New licensees may be assigned a role as a paraplanner or assigned to customer support roles.

It’s extremely rare that a large reputable firm will assign difficult planning cases to junior and entry-level employees.

Every firm operates differently, of course; some firms have an almost multi-level-marketing structure where they will recruit almost anyone. These firms tend to provide little in the way of support and training and rely on the recruits selling quickly to family and friends, just like Beachbody coaching or Young Living.

Typically, new recruits won’t stay in this model long, they will either wash out, leave to start their own firm, or try to seek employment at a more “reputable” financial firm.

A discussion on the inner workings of the industry is beyond the scope of this article, however, as a consumer of advice, you need to take away a few pieces of intelligence:

1. Securities exams are not credentials. Having passed an exam does not imply the licensee has specialized knowledge. Its expected that they will get relevant experience and training at their firm.
2. The type of firm the licensee works or worked for will determine the quality of the training and experience that have received.
3. It’s important - when relying on the experience of an individual, you understand what that experience really is.

Why an Advisor

The perception in the blogosphere is that advisors simply gather up assets and charge 1.5% of the assets doing nothing more than what the client could have done for themselves.

This stereotype of the industry is a bit outdated.

To be fair, there are some advisors like that. However, the industry is evolving.

Today, advisors are moving past this cliché and are taking a more hands-on and holistic approach with their clients. Most advisors want the same results for their clients as bloggers, journalists and podcasters want for their audience - that is, to help clients reduce unnecessary fees and expenses.

Many advisors routinely recommend no-load, and low-cost investments. Many times, they may even recommend money blogger's perennial favorites like Vanguard or Fidelity.

So, contrary to popular belief, advisors are not engaged in an epic conspiracy to shut out the public from low-cost index funds. It is possible some are, but not as a whole.

Most clients with whom I have met other the years are extremely cost conscious. In fact, no matter how amazing of a plan I can present, the first question I always hear is, how much will this cost?

Most clients did not build up a sizable net worth only to be naive to fees - they demand and expect advisors to deliver value.

The world of financial advising is hyper-competitive, and most seasoned professional did not survive the onslaught of discount brokers, robo-advisors, index funds and other advisors by failing to deliver value to their clients.

All that said, there are many planning issues when working with an advisor that might create a legitimate concern...to name a few:

1. When there is a significant age difference between spouses
2. When families are blended (not everyone gets along like the Brady Bunch)
3. When Health insurance is costing you more than 9% of your income
4. You have children with special needs
5. Deciding when to claim Social Security benefits or pension options
6. If there is any concern one spouse could someday go into a nursing home and you do not have LTC insurance.
7. If the passing of one spouse would negatively impact the surviving spouse financially
8. You and your partner do not agree on objectives or how to approach finances
9. You need a little reassurance that you are on the correct path
10. Your net worth is comprised of significant illiquid or hard-to-evaluate assets, such as privately held business, farmland, or patents and royalties.

License to Steal

So, maybe I convinced you financial advisors are not so bad after all, and you are willing to give advisors a 2nd chance. Now, you might be thinking you need to navigate the alphabet soup of letters, credentials and licenses advisors may hold.

Time for the controversy….it kind of doesn’t matter.

Note: You should always check to make sure an advisor is appropriately licensed. You can go to ethics.net and do a background search on an advisor.

There is a slew of various credentials and licenses a financial advisor may hold. Most individuals in the industry will accumulate all these super special abbreviations over a career, hence the alphabet soup after their name.

None of these credentials ensures that you will receive good advice or that the holder has relevant experience.

In fact, I would go as far to say that if anyone tries to use a credential to convince someone of a plan, proceed with caution. Real experience is demonstrated; it’s not some fancy piece of paper hanging on the wall.

What About the Fiduciary Rule?

First, a word of caution: There is some pretty heavy financial terminology here, but stick with me. This is one of the most important elements in choosing the very best financial advisor.

Simply put, a fiduciary must believe they are acting in your best financial interest.

The problem with a "fiduciary" is no one agrees what "your best financial interest" is. Investment Advisors were fiduciaries before the "Fiduciary Rule" and despite the regulation, being a fiduciary doesn’t prevent some of them from giving bad advice or doing the wrong thing.

For years, Investment Advisors have used their status as a fiduciary as a selling point against Registered representatives who historically did not have the same fiduciary standard. Ironically, often the Registered Representatives are the more highly regulated of the two.

Registered Representatives work under a broker-dealer who is tasked with, among other things, making sure their representatives are behaving in a compliant and ethical manner. A Registered Representative must typically make sure all their communication with the public (i.e., social media, marketing, blog posts, etc.) are approved with their compliance department.

Investment advisors will often set up their own firms, and the advisor is their own compliance department.

Many times, they will produce marketing and advertising that otherwise would not get approved by the broker-dealer. In fact, this marketing ‘leeway” is often used as a sales tactic by firms to get Registered Representatives to leave their broker-dealer and become an Investment Advisor only.

Many times, an Investment Advisor will have much less supervision than a registered representative. Some of the biggest Ponzi schemes were pulled off by investment advisors aka “fiduciaries”.

I’m not advocating for one type of professional over another; all I am suggesting is that every group attempts to take the moral high ground, arguing that their way is superior.

The reality is there is not a credential or license that guarantees that a plan is what you want and need, or that it will perform as indicated.

You must do your homework, and don’t let your guard down because your advisor is an “ABC whatever”.

Why "why" is more important than "what"

One of the biggest mistakes I see consumers make when selecting financial advice is confusing purchasing a product with designing a plan. The blogosphere loves to talk about how they like this, or they hate that. This product is great, or that product is too expensive.

Remember that cost, price and value are all subjective and situational.

A good financial plan starts with assessing a problem or establishing a goal and finding out how to solve that problem or reach that goal with the available resources. What is difficult for a lot of us to understand is that an imperfect situation may require an imperfect solution.

Not every client that walks through the doors has had the benefit of reading FIRE blogs or books for the last 20 plus years.

Sometimes, even the very best of planning is laid to waste by death, disability, lawsuit or divorce. These situations often require heroic measures such as life insurance, annuities with income riders, or even reverse mortgages.

It's important to focus on the why; why is more important than what.

When meeting with a financial advisor, ask them “why are you recommending this to me”, and “why do you feel it best serves my goals”.

Don't be afraid of unique solutions, they may be just what you were looking for. Asking why will help you understand your advisor’s philosophy, and you can determine if their philosophies correlate with your own.

Clarifying Confusion

Another mistake I see consumers routinely make is confusing bad application, bad design, and bad product.

Bad application is when an advisor recommends a product or solution that does not fit in with your overall goals and objectives. For example, if I go to the Ford Dealer looking for a truck and then get talked in into a car, it doesn’t matter how good of a car it is, it's not what I wanted and I'm probably going to be disappointed.

Bad design is when a product is designed efficiently, but increases cost unnecessarily or reduce performance. For example, if I go to the same Ford Dealer looking for a truck with maximum towing capacity, and they give me a truck with the maximum tow package but the smallest engine, the truck might be a great truck, but I’m going to be disappointed when towing uphill.

A bad product is simply when the product is not competitive among its peers. For example, imagine on the way to the truck dealer, a salesman sees me and talks me into some truck brand I never heard of before. The salesman claims it’s just as good as a Ford, and it will save me tons of money, so I agree to buy the truck (since he is licensed). When I get the truck, I realize it does not have the same reliability, quality and capabilities of the truck I really wanted.

An old business saying goes: if you have a happy customer they will tell one person; if you have an unhappy customer, they will tell five. I think that was written before the days of blogs, Yelp and social media. Today, if you have an upset customer, they will tell everyone.

Should someone experience a bad application, they will complain about how awful the product was, despite the fact it may be perfect for someone in the correct situation.  Similarly, someone with a bad design may blame the vehicle rather than the person who set it up. Anyone who experiences a bad product may wash their hands of the whole vehicle class.

All of these people will immediately go out and complain on social media, and, before you know it, the very vocal minority will have you convinced XYZ thing is no good. This could lead to you missing out on the advice and planning you need.

Do your homework when researching advice online. Listening to the wrong people could end up costing you more than you realize.

Getting Good Advice

To get the very best financial advice from advisors, you need to do two things:

1. Get 2nd, 3rd, and 4th opinions; visit every advisor in town if need be.
2. Don't show any advisor what the other advisors recommended.

It does not matter if the Advisor is a CFP, Fiduciary, Registered Representative, Hybrid, Fee-Only, or whatever. They all have one goal: they want you to work with them and not someone else and there is not a credential or compensation method that is any more or less impartial or fundamentally more altruistic.

Advisors do this exceptionally well, and that's to pick apart someone else's work. If you go into a meeting with an advisor and the previous advisor recommended ABC funds, well then, you are about to get a lesson on why ABC funds are the "great Satan".

Ask every advisor to design what they believe is the best plan possible, then you can take all the plans and compare the pros and cons of each on your own. If an advisor really has your best interest at heart and knows the best way to help you reach your goals, they should have no issue with putting their best foot forward without knowing what everyone else in town is recommending.

Conclusion

Not everyone will benefit from a financial advisor.

If your plan and goals are straightforward, an advisor may not add much value. However, if you are unsure whether you are on the right path, or maybe you feel you are paying too much in taxes or health insurance, a financial advisor may be just what you need.

Most advisors will offer a professional consultation for no fee or charge so generally, there is no risk to meeting with them and finding out what may be possible.

Just don't rush into anything and make sure you do your homework.

Author Bio: Michael has worked in the financial services industry for nearly 20 years. He lives in rural PA with his wife, two children, and too many animals. Michael shares his experience, unique insights, and profiles inspirational success stories at Your Money Geek.